<PAGE>   1


                                                                   Exhibit 10.26

                FORM OF SECOND SERIES SHORTFALL FUNDING AGREEMENT


                  THIS AGREEMENT ("AGREEMENT") is made as of the Documentation
Date by and among ____________________________________, a Delaware limited
liability company (the "LESSEE"), the member(s) of Lessee listed on Schedule A
attached hereto (collectively, the "MEMBER") and Balanced Care Corporation, a
Delaware corporation ("BCC").

                               W I T N E S S E T H

                  WHEREAS, the Member constitutes the holder of all equity
interests in the Lessee; and

                  WHEREAS, Lessee executed and delivered the Lease dated as of
the Documentation Date (the "LEASE") between Lessee and Nationwide Health
Properties, Inc., a Maryland corporation (the "LESSOR"), whereby Lessee leased
from Lessor property, together with all improvements built or to be built
thereon, located in ___________________________, as more fully described in the
Lease (the "PROPERTY"); and

                  WHEREAS, the Lessee and _________________________________, a
Delaware corporation (the "MANAGEMENT FIRM") have entered into that certain
Management Agreement dated as of the Documentation Date (the "MANAGEMENT
AGREEMENT") whereby Lessee has appointed the Management Firm as the exclusive
manager and operator of the Facility; and

                  WHEREAS, Lessor and BCC Development and Management Company,
Inc., a Delaware corporation ("Developer") have entered into a Development
Agreement dated as of the Documentation Date (the "Development Agreement") for
the purpose of developing the Facility; and

                  WHEREAS, the Developer and the Management Firm are
wholly-owned subsidiaries of BCC; and

                  WHEREAS, Lessee will deposit immediately available funds from
time to time as specifically provided in this Agreement to fund the Working
Capital Reserve (to be used to fund Shortfalls); and

                  WHEREAS, such funds to be deposited in the Working Capital
Reserve will come from the proceeds of the Senior Note issued by Lessee to the
Senior Lender pursuant to the Senior Credit Documents; and

                  WHEREAS, upon the advance of the entire principal amount of
the Senior Note and depletion of the Working Capital Reserve, BCC intends to
make Advances to the Lessee, on the terms and conditions herein stated, to fund
continuing Shortfalls; and


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                  WHEREAS, BCC is willing to fund Advances to Lessee covering
Shortfalls after the entire amount of the Senior Note has been advanced and upon
depletion of the Working Capital Reserve, only on the terms and conditions
provided in this Agreement.

                  NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:


                                    ARTICLE I
                               FUNDING SHORTFALLS

                  SECTION 1.01 FUNDING; CAPITALIZATION OF LESSEE; WORKING
CAPITAL RESERVE. (a) Each Member (jointly and severally if more than one) hereby
agrees to contribute as capital to the Lessee the following capital
contributions:

                  (i) At such time as BCC or the Management Firm requests, and
upon receipt of advances from Senior Lender under and in accordance with the
Senior Note, the Member and/or the Lessee shall deposit into the Collateral
Account so much of such funds so advanced under the Senior Note, up to the
maximum amount of no less than of $__________, representing 15% of the total
capital needed to fully fund the Working Capital Reserve; and

                  (ii) on or before August 1, 1999, but subject to the
provisions of Section 1.01(c) below, the Member shall have deposited into the
Collateral Account funds sufficient to make the total amounts contributed to the
Working Capital Reserve equal the sum of $__________.

Time is of the essence with respect to each contribution described in this
Section 1.01(a).

                  (b) The contributions described in Section 1.01(a) shall be
made directly into the Collateral Account. Each contribution of funds into the
Collateral Account as provided in this Section 1.01 is referred to herein as a
"FUNDING", and the aggregate of all Fundings to be made into the Collateral
Account as provided in Section 1.01(a)(ii) above is referred to as the "WORKING
CAPITAL RESERVE"). As contemplated pursuant to the Senior Note, BCC or the
Management Firm will from time to time request that Fundings be made under the
Senior Note into the Collateral Account to fund the Working Capital Reserve.
Under the Working Capital Assurance Agreement, the Lessor may also request
Fundings. No Fundings may be made into the Collateral Account until such time as
BCC or the Management Firm (or the Lessor, as appropriate) so requests;
provided, however, if BCC or the Management Firm has failed to make a request
for Fundings as provided under the Senior Note (and if the Lessor has failed to
make a request for Fundings pursuant to the Working Capital Assurance
Agreement), and a Shortfall exists, BCC shall be obligated to make Advances
pursuant to the provisions of Section 1.02 below if all other conditions to
making such Advances have been satisfied or waived in writing by 




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BCC.

                  (c) BCC, the Member and Lessee recognize that Senior Lender
has not committed to fund sums into the Working Capital Reserve in excess of the
principal amount of the Senior Note. Lessee, the Member and BCC understand that
Senior Lender will either approve or disapprove of funding the remainder of the
Working Capital Reserve pursuant to one or more additional senior notes on or
before July 18, 1998. Lessee and the Member agree to provide notice to BCC
within 24 hours of receipt of notice from Senior Lender as to whether Senior
Lender has approved the additional Fundings into the Working Capital Reserve.
Notwithstanding any provision to the contrary contained herein or in the other
Transaction Documents, in no event shall Lessee or the Member be required to
fully fund the Working Capital Reserve as provide in Section 1.01(a)(ii) above,
in no event shall Lessee or the Member be in Default hereunder, and in no event
shall an Event of Default be declared by BCC or any BCC Affiliate, solely as a
result of a failure by Senior Lender to approve the funding of the remaining
amounts to be deposited into the Working Capital Reserve as provided in this
Section.

                  (i) In the event Senior Lender approves by July 18, 1998 the
additional Funding pursuant to one or more additional senior notes such that the
Working Capital Reserve will be fully funded by the date provided in Section
1.01(a)(ii) above, Lessee, the Member and BCC shall promptly thereafter execute
such further documents and instruments as may be reasonably requested by BCC,
the Member, Lessee and/or Senior Lender to effect such additional Fundings,
including the issuance by Lessee of additional senior notes.

                  (ii) In the event the Senior Lender fails to approve the
additional Fundings into the Working Capital Reserve on or before July 18, 1998
such that the Working Capital Reserve will be fully funded by the date provided
in Section 1.01(a)(ii) above, the Member shall have the opportunity (but not the
obligation) until October 31, 1998 to arrange for additional Fundings into the
Working Capital Reserve such that the Working Capital Reserve will be fully
funded by the date provided in Section 1.01(a)(ii) above. Such additional
Fundings, and the parties providing such additional Fundings, shall be subject
in all respects to the prior written approval of BCC. Without limiting other
requirements for such approval by BCC, the parties providing such additional
Fundings shall execute such further instruments and documents, and agree to such
additional terms, as BCC may reasonably request, including agreeing to be bound
by provisions similar to those contained in Section 7.02 below. Lessee shall
give prompt notice to BCC in the event that Lessee determines that Lessee will
not be in a position to arrange for the additional Fundings in the Working
Capital Reserve as provided in this subsection.

                  (iii) In the event that the Senior Lender does not approval
the additional Fundings on or before July 18, 1998 such that the Working Capital
Reserve will be fully funded by the date provided in Section 1.01(a)(ii) above,
and the Member has not obtained a source for the additional Fundings on or
before October 31, 1998 on terms and conditions and with parties satisfactory to
BCC, BCC shall have the right at any time thereafter, but not the obligation, to
require that the Member sell all of the Equity Interests to BCC or its designee
in the manner




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provided for in the Option Agreement; provided, however, the purchase price for
the Equity Interests shall be the sum of (A) the amount of Fundings actually
advanced by Senior Lender under the Senior Note and deposited into the
Collateral Account, plus (B) an amount calculated on a pro-rata basis as 27.5%
per annum of the amount of funds actually advanced under the Senior Note to or
for the benefit of Lessee and contributed into the Working Capital Reserve from
the date of deposit through the date of Closing, plus (C) reimbursement for all
organizational and qualification costs of Lessee (not to exceed with respect to
such organizational and qualification costs, $3,000). In such event, all terms
and conditions of the sale applicable to the Option shall be equally applicable
to the sale under this Section 1.01(c)(iii), and the failure by the Member to
close on such sale within 5 business days after written notice from BCC (time
being of the essence) shall constitute an Event of Default.

                  (d) The Member and the Lessee acknowledge and agree that (i)
Fundings under the Senior Note and any other borrowings of Lessee to fund the
Working Capital Reserve shall be recourse to the Member to the extent that such
Member will be liable for no less than 15% of the total amount to be funded into
the Working Capital Reserve as provided in Section 1.01(a)(ii) above, (ii) the
Member has sufficient funds in personal accounts such that the guaranty of
Indebtedness in connection with sums borrowed for the Working Capital Reserve is
meaningful and has a likelihood of being repaid and (iii) Lessor and the
Management Firm may (without notice to Lessee or Member, and whether acting
alone or together) withdraw funds from the Working Capital Reserve to fund
Shortfalls with respect to the Facility as provided in the Transaction Documents
and the Lease Documents.

                  SECTION 1.02 ADVANCES. Upon the advance of all sums under the
Senior Note (and, if applicable, the advance of all sums under additional senior
notes to fully fund the Working Capital Reserve) into the Working Capital
Reserve and the complete depletion of the Working Capital Reserve, and to the
extent thereafter of any Shortfall, BCC hereby agrees to advance from time to
time funds to the Lessee upon no less than five (5) days prior written notice,
upon the terms and conditions provided herein (each advance being an "ADVANCE"
and collectively, the "ADVANCES"). Advances shall be evidenced by one or more
promissory notes issued by the Lessee in the form attached hereto as Exhibit A
(the "NOTES"). The Notes shall mature on the anniversary of the fifth year after
issuance of the first Note issued under this Agreement. Interest shall accrue on
the Notes at the rate of 2% over the Prime Rate as announced from time to time
in the Eastern Edition of the Wall Street Journal (or, in the event of the
discontinuance of the publishing of the Prime Rate in such Eastern Edition of
the Wall Street Journal, such other source as the parties may agree), and shall
be payable in arrears on the first day of each calendar quarter. All sums owed
under the Notes and hereunder to BCC, and all other obligations and covenants
under the Transaction Documents applicable to Lessee and the Member (including
the obligations of the Member under the Option Agreement), together with all
interest payable under the Transaction Documents and all other costs and
expenses payable by Lessee or any Member to or for the benefit of BCC or any BCC
Affiliate (including indemnification and defense obligations) are referred to
herein as the "OBLIGATIONS". Notwithstanding any provision to the contrary




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contained in the Transaction Documents, the provisions of this Section 1.02, and
any Notes issued hereunder, shall be subject in all respects to the terms and
conditions of Section 7(c) of the Option Agreement.

                  SECTION 1.03 ASSET PURCHASE OPTION. (a) The Lessee and the
Member hereby grant to BCC an option (the "ASSET PURCHASE OPTION") to purchase
all of the assets of the Lessee (including the option to take an assignment of
the Lease) for the Asset Purchase Price. The Asset Purchase Option may be
exercised by BCC by providing written notice to the Lessee at any time during
the term of the Lease. The closing of the purchase of the assets of the Lessee
shall take place within 30 days after BCC exercises the Asset Purchase Option at
such location in Pennsylvania as BCC may designate. At the closing of the asset
purchase, the Lessee shall transfer, assign and convey to BCC (or its designee)
all assets of Lessee, free and clear of all Liens and restrictions of any kind
or nature, except for Liens or restrictions in favor of the Lessor pursuant to
the Lease Documents or in favor of BCC pursuant to the Transaction Documents
(provided, however, Liens in favor of BCC securing Advances or other Obligations
shall be paid in full by Lessee and the Member at the closing of the asset
purchase). The Lessee (and the Member if requested by BCC) shall execute and
deliver at the closing of the asset purchase an assignment of lease (assigning
the Lease to the purchaser), a bill of sale conveying all other assets of the
Lessee and such other documents and instruments as BCC may reasonably request,
all in form and substance reasonably satisfactory to BCC. The "ASSET PURCHASE
PRICE" as used herein shall mean (i) all amounts actually funded into the
Working Capital Reserve (including advances for interest due under the Senior
Note), plus (ii) an amount (calculated as a yearly return) equal to 27.5% of the
Working Capital Reserve actually funded through Fundings, compounded annually
through the closing date, plus (iii) the aggregate amount of all Advances and
all other Obligations due and payable by Lessee or the Member to BCC or a BCC
Affiliate through the closing date (exclusive of the Management Fee), minus (iv)
any payments made to the Member under the Option Agreement. To avoid any doubt,
BCC shall receive a credit against the Asset Purchase Price for any payments
made to the Member under the Option Agreement paid as Current Yield in advance
to the extent that such advance Option Payments are attributable to Current
Yield accruing after the closing date. All Advances and all other Obligations
due and payable by Lessee or the Member to BCC or a BCC Affiliate through the
closing date of the asset purchase shall be payable from the Asset Purchase
Price to BCC or the BCC Affiliate, as appropriate. Notwithstanding any provision
to the contrary contained in the Transaction Documents, the provisions of this
Section 1.03 shall be subject in all respects to the terms and conditions of
Section 7(c) of the Option Agreement and Section 6.04 of this Agreement.

                  (b) Notwithstanding any provision to the contrary contained
herein or in any other Transaction Document, BCC agrees that the Asset Purchase
Option shall not be exercised unless (i) BCC or its designee is prohibited (by
operation of law, or any other reason other than the acts or omissions of BCC or
any BCC Affiliate) from exercising the Option to acquire the Equity Interests
pursuant to the Option Agreement or (ii) the Lessee or any Member is in Default
of any covenant, agreement, representation or warranty contained in this
Agreement (except for a Default in the payment of interest under the Notes) or
the Option Agreement, which Default was 




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not caused by BCC or any BCC Affiliate.

                  SECTION 1.04 TRANSACTION DOCUMENTS. In addition to the Notes,
and to better secure the performance of Lessee hereunder and under the other
Transaction Documents, Lessee and the Member (as applicable) have executed and
delivered to Lessor or BCC (as applicable) the following:

                           (i)      the Lease and the other Lease Documents to
                                    which it is a party;

                           (ii)     Leasehold Mortgage in the form attached
                                    hereto as Exhibit B encumbering the Property
                                    in favor of BCC (the "LEASEHOLD MORTGAGE");

                           (iii)    the Deposit Pledge Agreement and the Pledge
                                    Agreement; and

                           (iv)     such other documents, certificates, powers,
                                    affidavits and instrument as BCC may
                                    reasonably request.

                  In addition to the foregoing documents, the Member has
                  executed and delivered to BCC the Option Agreement (the
                  "OPTION AGREEMENT") substantially in the form attached hereto
                  as Exhibit C, whereby each Member has agreed that BCC shall
                  have an option to purchase the equity interest of each Member
                  in Lessee, on the terms and conditions provided therein.

                  SECTION 1.05 INTEREST PAYMENTS. In no event shall the amount
of interest due or payable pursuant to any Transaction Document (exclusive of
payment made under the Option Agreement and sums paid in connection with the
Asset Purchase Option) exceed the maximum rate of interest allowed by Law and,
in the event any such payment is inadvertently paid by the Lessee or the Member
or inadvertently received by BCC or any BCC Affiliate, then such excess sum
shall be credited as a payment of principal due to BCC or any BCC Affiliate. It
is the express intention of the parties hereto that neither the Lessee nor the
Member pay to BCC, directly or indirectly, in any manner whatsoever, interest in
excess of that which may be lawfully paid by the Lessee.

                  SECTION 1.06 INTENTION. It is the intention of BCC, the Member
and Lessee that (i) the Management Firm operate the Facility pursuant to the
Management Agreement and that Lessee act as a passive investor with respect to
the Facility, (ii) Lessee include on its financial statements all revenue and
losses with respect to the Facility during the term of this Agreement for
accounting purposes, and (iii) Advances made hereunder and all other obligations
of Lessee and the Member under the Transaction Documents be secured by and
pursuant to the Leasehold Mortgage and the Pledge Agreement, but subject to the
rights of Lessor under the Lease, regardless of any bankruptcy, insolvency,
receivership or similar proceedings instituted by or




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against Lessee. BCC, each Member and Lessee agree to take no position
inconsistent with the intention of the parties as herein stated.


                                   ARTICLE II
                             CONDITIONS TO ADVANCES

                  SECTION 2.01 CONDITIONS PRECEDENT TO ADVANCES. The obligations
of BCC to accept delivery of the Transaction Documents and make Advances are
subject to the condition precedent that BCC receives the following five days
prior to the making of any Advance:

                  (a)      the Note(s);

                  (b)      the Working Capital Assurance Agreement;

                  (c)      the Leasehold Mortgage;

                  (d)      the Option Agreement;

                  (e)      the Management Agreement;

                  (f)      a certificate of the Secretary of State of the State
of Delaware stating that the Lessee is duly organized, validly existing and in
good standing in such state;

                  (g)      a certified copy of the Operating Agreement of the
Lessee and the Member, together with certified resolutions or authorizations of 
the Lessee and the Member granting the power to Lessee and the Member to enter 
into and perform the Transaction Documents;

                  (h)      all other Transaction Documents; and

                  (i)      the Lease and all other Lease Documents.

                  SECTION 2.02 ADDITIONAL CONDITIONS PRECEDENT TO ADVANCES. The
obligation of BCC to accept delivery of the Transaction Documents and consummate
this transaction, and to make any Advance, shall be further subject to the
condition precedent that the following statements shall be true and correct (and
the delivery by the Lessee and the Member of the Note and the other Transaction
Documents shall be deemed to constitute a representation and warranty by the
Lessee and the Member that such statements are true on such date):

                           (i) The representations and warranties contained in
                  Article III of this Agreement and the other Transaction
                  Documents are true and correct in all 




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                  material respects on and as of date of the execution and
                  delivery of this Agreement, at the time of each Advance, and
                  as of each date until the Obligations are satisfied in full;
                  and

                           (ii) No event has occurred and is continuing which
                  constitutes a Default or an Event of Default on the part of
                  the Lessee or the Member under any of the Transaction
                  Documents.


                                   ARTICLE III
                         REPRESENTATIONS AND WARRANTIES

                  SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF THE LESSEE. The
Lessee and each Member represents and warrants as follows:

                  (a) ORGANIZATION; QUALIFICATION. The Lessee is a limited
liability company duly formed, validly existing and in good standing under the
laws of State of Delaware, has qualified to do business in the State in which
the Facility is located, and has the power and authority to own its properties
and to carry on its business as now being and hereafter proposed to be
conducted; provided, however, notwithstanding any provision to the contrary
contained herein or in the other Transaction Documents, if the foregoing is
false or misleading (and so long as such representation or warranty was not made
false or misleading as a result of the acts or omissions of Lessee or the
Member), in no event shall BCC fail to fund Advances if required to do so
hereunder or raise as a defense to the consequences of BCC's failure to make
Option Payments the failure of the foregoing from being true and correct, but
neither Lessee nor the Member shall raise as a defense to the obligations of
Lessee or Member hereunder or under any other Transaction Document the failure
of the foregoing from being true and correct in all material respects.

                  (b) POWER; AUTHORITY. The execution, delivery and performance
by the Lessee of this Agreement and the other Transaction Documents to which it
is a party are within the Lessee's power and have been duly authorized by all
necessary action, and this Agreement and the other Transaction Documents to
which Lessee is a party have been duly executed and delivered by the duly
authorized representative of the Lessee.

                  (c) APPROVAL OR CONSENTS. No approval or consent of any
foreign, domestic, federal, state or local authority is required for the due
execution, delivery and performance by the Lessee of this Agreement or any other
Transaction Document to which it is a party and the execution, delivery and
performance by the Lessee of this Agreement and the other Transaction Documents
to which it is a party do not conflict with, and will not result in the breach
of or default under, any contract, agreement or other document or instrument to
which the Lessee is a party or by which its properties are bound.



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                  (d) BINDING OBLIGATIONS. This Agreement and the other
Transaction Documents to which the Lessee is a party are legal, valid and
binding obligations of the Lessee enforceable against the Lessee in accordance
with their respective terms, except as the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or other laws affecting generally the
enforcement of creditors' rights; provided, however, notwithstanding any
provision to the contrary contained herein or in the other Transaction
Documents, if the foregoing is false or misleading (and so long as such
representation or warranty was not made false or misleading as a result of the
acts or omissions of Lessee or the Member), in no event shall BCC fail to fund
Advances if required to do so hereunder or raise as a defense to the
consequences of BCC's failure to make Option Payments the failure of the
foregoing from being true and correct, but neither Lessee nor the Member shall
raise as a defense to the obligations of Lessee or Member hereunder or under any
other Transaction Document the failure of the foregoing from being true and
correct in all material respects.

                  (e) LITIGATION. There is no pending or, to the best of
Lessee's knowledge, threatened action, suit or proceeding against or affecting
the Lessee before any court, governmental agency or arbitrator.

                  (f) APPLICABLE LAW. The execution, delivery and performance of
this Agreement and the other Transaction Documents to which the Lessee is a
party, and the borrowings hereunder, do not and will not, by the passage of
time, the giving of notice or otherwise, violate any Law applicable to the
Lessee; provided, however, notwithstanding any provision to the contrary
contained herein or in the other Transaction Documents, if the foregoing is
false or misleading (and so long as such representation or warranty was not made
false or misleading as a result of the acts or omissions of Lessee or the
Member), in no event shall BCC fail to fund Advances if required to do so
hereunder or raise as a defense to the consequences of BCC's failure to make
Option Payments the failure of the foregoing from being true and correct, but
neither Lessee nor the Member shall raise as a defense to the obligations of
Lessee or Member hereunder or under any other Transaction Document the failure
of the foregoing from being true and correct in all material respects.

                  (g) TITLE AND CONDITION OF ASSETS. Except for Lessee's
leasehold interest in the Lease, the Lessee has good, marketable and legal title
to its properties and assets. The Lessee has a good and valid leasehold interest
in the Lease.

                  (h) LIENS. None of the properties and assets of the Lessee are
subject to any Lien or other charge other than Liens in favor of Lessor pursuant
to the Lease or the Senior Credit Documents, BCC as provided herein, or a BCC
Affiliate ("PERMITTED LIENS"), and the execution, delivery and performance by
the Lessee of this Agreement and the other Transaction Documents to which it is
a party will neither result in the creation of any Lien or other charge upon any
of the Lessee's properties or assets, nor cause a default under any agreements
to which Lessee is a party.



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                  (i) {INTENTIONALLY OMITTED}.

                  (j) TAX RETURNS AND PAYMENTS. All federal, state and other tax
returns of the Lessee required by Law to be filed have been duly filed, and all
federal, state and other taxes, assessments and other governmental charges or
levies upon the Lessee and its properties, income, profits and assets which are
due and payable have been paid; provided, however, if the failure to file such
tax returns was due to the acts or omissions of BCC or a BCC Affiliate, the
foregoing shall not constitute an Event of Default.

                  (k) NO EMPLOYEES. The Lessee has no employees for which it is
required to comply with the Employment Retirement Income Security Act of 1974.

                  (l) ABSENCE OF DEFAULTS. To the Lessee's and Member's
knowledge, no event has occurred, which has not been remedied, cured or waived,
which constitutes, or with the passage of time or giving of notice or both would
constitute, a Default or an Event of Default under any Transaction Document or
Lease Document or which constitutes or which with the passage of time or giving
of notice or both would constitute a default or event of default by the Lessee
under any agreement or judgment, decree or order, to which the Lessee is a party
or by which the Lessee or any of its properties may be bound.

                  (m) ACCURACY AND COMPLETENESS OF INFORMATION. No document
furnished or written statement made to BCC by Lessee or any Member in connection
with the execution of this Agreement or any of the other Transaction Documents
(or in connection with the organization or capitalization of Lessee by the
Members) contains or will contain any untrue statement of a material fact or
fails to state a material fact necessary in order to make the statements
contained therein not materially misleading.

                  (n) SUBSIDIARIES. The Lessee does not own, directly or
indirectly, of record or beneficially, any of the voting stock of any class or
classes of, or any other voting interests of, any Entity.

                  (o) INVESTMENT COMPANY. The Lessee is not an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.

                  (p) PUBLIC UTILITY COMPANY. The Lessee is not a "holding
company" or a "subsidiary company", or an "affiliate" of a "holding company",
within the meaning of the Public Holding Company Act of 1935, as amended.

                  (q) SOLE MEMBER. The Member is the sole member of Lessee, and
no other person or Entity holds any equity interest or other security in Lessee.



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                  (r) CAPITAL CONTRIBUTIONS. No less than 15% of the total
amount to be contributed to the Working Capital Reserve as provided in Section
1.01(a)(ii) above shall be guarantied personally by the Member, and the Member
has the financial resources and ability to so repay such Indebtedness.

                                   ARTICLE IV
                             COVENANTS OF THE LESSEE

                  SECTION 4.01 AFFIRMATIVE COVENANTS. So long as BCC or any BCC
Affiliate shall have any commitment or Obligation hereunder or under the other
Transaction Documents owed to it, the Lessee will and the Member shall cause the
Lessee to:

                  (a) COMPLIANCE WITH LAWS. Comply, in all material respects
with all applicable Laws, such compliance to include paying before the same
become delinquent all taxes, assessments and governmental charges imposed upon
it or upon its properties.

                  (b) {INTENTIONALLY OMITTED}

                  (c) NOTICE OF LITIGATION AND OTHER MATTERS. Promptly give
notice to BCC of the following: (i) any actions, suits or proceedings instituted
against the Lessee; (ii) any change in the chief executive office, principal
place of business or location of the books and records of the Lessee and (iii)
the occurrence of a Default or an Event of Default.

                  (d) {INTENTIONALLY OMITTED}

                  (e) PRESERVATION OF EXISTENCE AND SIMILAR MATTERS. Preserve
and maintain its existence under the Laws of the state of its formation, and
preserve and maintain its rights, franchises, licenses and privileges in such
state as a limited liability company, and qualify and remain qualified and
authorized to do business in such state.

                  (f) BUSINESS. At all times endeavor to carry on its business
in the most efficient manner possible under the circumstances and engage only in
the business presently carried on by the Lessee.

                  (g) FURTHER ASSURANCES. At BCC's request, from time to time,
execute, acknowledge or take such further action as BCC may reasonably require
(i) to effectuate the purposes of this Agreement and the purposes of the other
Transaction Documents or (ii) to comply or consent to such actions as BCC may
wish to comply or consent to on behalf of Lessee under the Lease Documents.



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Provided, however, notwithstanding anything to the contrary contained in this
Section 4.01, Lessee shall not be in default hereunder to the extent that the
obligations described in this Section 4.01 are required to be performed by the
Management Firm under the Management Agreement.

                  SECTION 4.02 NEGATIVE COVENANTS. Except as expressly permitted
under the Transaction Documents or the Lease Documents, so long as BCC shall
have any commitment or Obligation hereunder or under the other Transaction
Documents owed to it, the Lessee will not, and no Member will cause the Lessee
to, without the prior written consent of BCC:

                  (a) LIENS CREATED BY LESSEE. Create or suffer to exist any
Lien or any other type of preferential arrangement, upon or with respect to any
of its properties, whether now owned or hereafter acquired, or assign any right
to receive income, other than Permitted Liens.

                  (b) DISTRIBUTIONS. Make any distribution of cash or other
property to the Member (other than payments to the Member to satisfy Federal,
state or local income tax consequences resulting exclusively from the operations
of the Facility) or declare or pay any dividend or distribution on any
securities of Lessee.

                  (c) OTHER BUSINESS. Engage in any business venture or enter
into any agreement with respect to any business venture, except as expressly
provided in the Transaction Documents with respect to the Facility.

                  (d) TRANSFER OF ASSETS. Except as expressly contemplated in
the Transaction Documents to BCC or an Entity designated by BCC or otherwise as
expressly permitted in the Lease with respect to Subleases of a portion of the
Facility, convey, transfer, lease, sublease, assign or otherwise dispose of
(whether in one transaction or in a series of transactions) any of its assets
(whether now owned or hereafter acquired) to, or acquire all or substantially
all of the assets of, any person or Entity. The restrictions of this Subsection
shall include a prohibition on any assignment, pledge, hypothecation or other
transfer of the Lease or sublease or license of the Facility, except to BCC or a
BCC Affiliate in accordance with the terms and conditions of the Lease or
otherwise as expressly permitted in the Lease with respect to Subleases of a
portion of the Facility.

                  (e) INDEBTEDNESS FOR BORROWED MONEY. Create, assume, guaranty
or otherwise become or remain obligated in respect of, or permit or suffer to
exist or to be created, assumed or incurred or to be outstanding, any
Indebtedness, except Indebtedness incurred to BCC or a BCC Affiliate under the
Transaction Documents or Indebtedness incurred to Lessor as expressly provided
in the Lease Documents.

                  (f) CREATION OF AFFILIATES. Form, organize or participate in
the formation or organization of any Entity, or make any investment in any newly
formed or existing Entity.



                                       12
<PAGE>   13



                  (g) LOANS. Extend credit to or make any advance, loan or
contribution to any person or Entity.

                  (h) GOVERNANCE DOCUMENTS. Amend, supplement or otherwise
modify the terms of the Articles of Formation or the Limited Liability Company
Agreement of the Lessee in any way.

                  (i) OTHER TRANSACTIONS WITH LESSOR. Enter into any transaction
with Lessor or any affiliate or related party to or with Lessor, other than
pursuant to the Transaction Documents.

                  (j) TRANSFERS OF EQUITY INTERESTS. Permit the Member to
transfer all or any portion of the Member's Equity Interest in Lessee.

                  (k) AMEND TRANSACTION DOCUMENTS. (i) Amend, terminate,
supplement or otherwise modify any Transaction Document, (ii) waive any default
or potential event of default by Lessor under, or consent to any action
requested by Lessor pursuant to, any Lease Document, (iii) declare a default or
event of default under any Lease Document, (iv) exercise any right to extend the
term of the Lease, (v) exercise any right to purchase the Facility or exercise a
right of refusal with respect thereto, or (vi) exercise any right to cancel the
Lease as a result of a casualty or condemnation with respect to the Facility, or
otherwise.

                  (l) MERGERS AND CONSOLIDATIONS. Merge or consolidate with,
purchase all or any substantial part of the assets of, or otherwise acquire any
Entity.

                  (m) ISSUANCE OF SECURITIES. Except for the equity interests of
the Lessee that have been issued to the Member and are outstanding as of the
date hereof, issue any equity interests or options, warrants or other rights to
purchase any equity interests or any securities convertible or exchangeable for
equity interests, or commit to do any of the foregoing.



                                       13
<PAGE>   14



                                    ARTICLE V
                                EVENTS OF DEFAULT

                  SECTION 5.01 EVENTS OF DEFAULT. Each of the following events
shall constitute an event of default hereunder ("SHORTFALL EVENT OF DEFAULT"),
whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment or
order of any court or any order, rule or regulation of any governmental or
nongovernmental body; provided, however, notwithstanding anything to the
contrary contained in this Section 5.01, no Shortfall Event of Default may be
declared hereunder in the event that the Shortfall Event of Default resulted
from a default on the part of BCC or a BCC Affiliate under any of the
Transaction Documents:

                  (a) The Lessee shall fail to make any payment of principal or
interest, as stated in the Notes, when due (a "MONETARY DEFAULT"); or

                  (b) Any material representation or warranty made by the Lessee
or the Member under or in connection with any Transaction Document shall prove
to have been incorrect or misleading in any material respect when made; or

                  (c) The Lessee or the Member shall fail to perform or observe
any term, covenant or agreement contained in this Agreement, or in any other
Transaction Document, on its or their part to be performed or observed beyond
the applicable cure period; or

                  (d) The Lessee or the Member shall generally not pay its debts
when due; or

                  (e) The Lessee or any Member shall admit in writing its
inability to pay its debts generally, or shall make a general assignment for the
benefit of creditors; or any proceeding shall be instituted by or against the
Lessee or any Member seeking to adjudicate it a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of the Lessee or any Member of any of its
debts under any law relating to bankruptcy, insolvency or reorganization or
relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee or other similar official for the Lessee or
any Member or for any substantial part of its property; or the Lessee or any
Member shall take any action to authorize any of the actions set forth above in
this subsection; or

                  (f) Any nonappealable judgment or order for the payment of
money in excess of $50,000 shall be rendered against the Lessee and the same
shall not be discharged within 30 days after entry; or

                  (g) A warrant or writ of attachment or execution or similar
process shall be issued against any property of the Lessee which exceeds $50,000
in value and such warrant or process shall continue undischarged or unstayed for
30 consecutive days; or



                                       14
<PAGE>   15



                  (h) Any material provision of any Transaction Document to
which the Lessee or the Member is a party shall for any reason cease to be valid
and binding on the Lessee or the Member, or the Lessee or the Member shall so
state in writing; or

                  (i) The Leasehold Mortgage shall for any reason cease to
create a valid and perfected security interest in any of the collateral covered
thereby, subject in priority only to the Permitted Liens; or

                  (j) an Option Agreement Event of Default, a Mortgage Event of
Default, a Lease Event of Default, a Deposit Pledge Event of Default, an Other
Transaction Default or a Management Agreement Event of Default on the part of
Lessee or the Member shall occur and be continuing.


                                   ARTICLE VI
                                    REMEDIES

                  SECTION 6.01 APPLICABLE PROVISIONS UPON OCCURRENCE OF AN EVENT
OF DEFAULT. Upon the occurrence of a Shortfall Event of Default, the following
provisions shall apply:

                  (a)      ACCELERATION AND TERMINATION:

                           (i) Automatic. Upon the occurrence of a Shortfall
                  Event of Default specified in Section 5.01(e), the principal
                  of, and the interest on, the Notes at the time outstanding,
                  and all other amounts owed to BCC under this Agreement and any
                  of the other Transaction Documents, shall become automatically
                  due and payable without presentment, demand, protest, or other
                  notice of any kind all of which are expressly waived, anything
                  in this Agreement or the other Transaction Documents to the
                  contrary notwithstanding.

                           (ii) Optional. If any other Shortfall Event of
                  Default shall have occurred, and in every such event, BCC may
                  do the following: declare the principal of, and interest on,
                  the Notes at the time outstanding, and all other amounts owed
                  to BCC under this Agreement and the other Transaction
                  Documents, to be forthwith due and payable, whereupon the same
                  shall immediately become due and payable without presentment,
                  demand, protest or other notice of any kind, all of which are
                  expressly waived, anything in this Agreement or the other
                  Transaction Documents to the contrary notwithstanding.



                                       15
<PAGE>   16



                  (b) BCC'S RIGHT TO ENTER PROPERTY. Subject to the terms of the
Lease Documents and the Transaction Documents, BCC may enter upon the Property
and any premises on which collateral may be located and, without resistance or
interference by the Lessee, take physical possession of any or all thereof and
maintain such possession on such premises or move the same or any part thereof
to such other place or places as BCC shall choose, without being liable to the
Lessee on account of any loss, damage or depreciation that may occur as a result
thereof.

                  (c) USE OF PREMISES. BCC may, without payment of any rent or
any other charge, enter the Property and, without breach of peace, take
possession of the Property or place custodians in exclusive control thereof,
remain on such premises and use the same and any of the Lessee's equipment, for
the purpose of (i) operating the Facility and (ii) collecting any accounts
receivable.

                  (d) OTHER RIGHTS. BCC may exercise any and all of its rights
and remedies available under the other Transaction Documents, as well as those
available in Law or in equity.

                  (e) RIGHT TO FORECLOSE. Subject to the rights of the Lessor
under the Lease Documents and the Senior Credit Documents, BCC may foreclose
upon the Lease, take immediate possession of the Facility and Property and
operate the Property, all in accordance with the terms and conditions of the
Leasehold Mortgage.

                  SECTION 6.02 APPLICATION OF PROCEEDS. All proceeds from each
sale of, or other realization upon, all or any part of the Collateral following
a Shortfall Event of Default shall be applied or paid over as follows:

                  (a) First: to the payment of all costs and expenses incurred
in connection with such sale or other realization, including, without
limitation, the expenses for indemnification as provided herein;

                  (b) Second: to the payment of the interest due upon the Notes;

                  (c) Third: to the payment of the principal due upon the Notes
or any other payments owed to BCC under the Transaction Documents; and

                  (d) Fourth: the balance (if any) of such proceeds shall be
paid to the Lessee subject to any duty imposed by law or otherwise to the holder
of any subordinate lien in the Collateral known to BCC and subject to the
direction of a court of competent jurisdiction.

                  The Lessee shall remain liable and will pay, on demand, any
deficiency remaining in respect of the Obligations owing by the Lessee to BCC
after the application of proceeds set forth above together with interest thereon
at a rate per annum equal to the highest rate then payable 




                                       16
<PAGE>   17



hereunder.

                  SECTION 6.03  MISCELLANEOUS PROVISIONS CONCERNING REMEDIES.

                  (a) RIGHTS CUMULATIVE. The rights and remedies of BCC under
this Agreement and each of the other Transaction Documents shall be cumulative
and not exclusive of any rights or remedies which it would otherwise have. In
exercising its rights and remedies BCC may be selective and no failure or delay
by BCC in exercising any right shall operate as a waiver of it, nor shall any
single or partial exercise of any power or right preclude its other or further
exercise of any other power or right.

                  (b) WAIVER OF MARSHALLING. The Lessee hereby waives any right
to require any marshalling of assets and any similar right.

                  (c) LIMITATION OF LIABILITY. Nothing contained in this Article
VI or elsewhere in this Agreement or in any other Transaction Documents shall be
construed as requiring or obligating BCC or any agent or designee thereof to
make any demand, or to make any inquiry as to the nature or sufficiency of any
payment received by it, or to present or file any claim or notice or take any
action, with respect to any account or any other Collateral or the moneys due or
to become due under the Notes or any other Transaction Documents or in
connection therewith, or to take any steps necessary to preserve any rights
against prior parties and neither BCC nor any of its agents or designees shall
have any liability to the Lessee for actions taken pursuant to this Article VI,
any other provision of this Agreement or any other Transaction Documents, except
as otherwise provided by Law.

                  (d) WAIVER OF DEFENSES. Lessee hereby waives any and all
defenses, either by way of set-off as to matters arising prior to the date
hereof or any other defenses, which Lessee presently believes it has or which
Lessee may have in the future relating to defaults by the Lessee or the Member
under this Agreement or any other Transaction Document.


                  SECTION 6.04 REMEDIES OF LESSEE AND MEMBER. So long as no
Event of Default has occurred under any Transaction Document or Lease Document
which was caused by either the Member or the Lessee, in the event that BCC fails
to make Advances once required as provided herein, after ten (10) days prior
written notice of such failure sent by Lessee to BCC, Lessee and the Member
shall have the following remedies and rights: (i) BCC shall no longer have any
right to exercise the Option or the Asset Purchase Option, (ii) all Notes issued
by the Lessee pursuant to this Agreement shall automatically be amended to
provide that interest due under the Notes will accrue and not be due and payable
until the date which is the fifth (5th) anniversary of the date of issuance of
the first Note so issued by the Lessee pursuant to the Shortfall Agreement and
(iii) the lien encumbering the Equity Interests and other assets in favor of BCC
arising hereunder and under the Pledge Agreement and the Leasehold Mortgage
shall automatically be released and terminated. BCC agrees, after the failure to
make Advances and an opportunity to 




                                       17
<PAGE>   18



cure as provided herein, to execute such documents and instruments, and accept
delivery of such replacement Notes (returning the Notes to be replaced) as the
Member may reasonably request to effect the provisions of Subsections (i), (ii)
and (iii) above.



                                   ARTICLE VII
                              ADDITIONAL AGREEMENTS

                  SECTION 7.01 RIGHT TO CURE DEFAULTS UNDER TRANSACTION
DOCUMENTS. Lessee shall give BCC immediate notice of an default or event of
default under any Transaction Document received from Lessor. BCC shall have the
right, but not the obligation, to cure such default or event of default. To the
extent that BCC shall expend sums to cure any such default or event of default,
such sums shall be deemed Advances hereunder, payable upon demand.

                  SECTION 7.02 CONFIDENTIALITY.

                  (a) Lessee and the Member hereby covenant and agree, on behalf
of Lessee, the Member and all Lessee Affiliates, that all Confidential
Information (as hereinafter defined) will be held and treated by Lessee, the
Member, Lessee Affiliates and the agents and employees of Lessee, the Member and
Lessee Affiliates in confidence and will not, except as explicitly consented to
by BCC in its sole discretion, be disclosed by Lessee, the Member, Lessee
Affiliates or the agents and employees of Lessee, the Member or Lessee
Affiliates, in any manner whatsoever, in whole or in part, and will not be used
by the Member, Lessee, Lessee Affiliates or the agents and employees of Lessee,
the Member or Lessee Affiliates for any purpose whatsoever. Lessee and the
Member further agree on behalf of Lessee, the Member and Lessee Affiliates (i)
to disclose Confidential Information only to Lessee's employees who need to know
the Confidential Information for purposes related to the Facility, (ii) to
employ all reasonable procedures to ensure that neither the Lessee, the Member,
or Lessee Affiliates, nor any of their respective agents or employees use the
Confidential Information in connection with trading in the securities of BCC or
communicate such information to others who so trade in such securities and (iii)
that any Confidential Information not returned to BCC or the Management Firm, as
applicable, will be held by Lessee and kept subject to the terms of this Section
or destroyed.

         (b) As used in this Section, "Confidential Information" means all
information and data containing or otherwise reflecting information concerning
BCC or any BCC Affiliate, or any Other Facility, which is not available to the
general public but is material to the business, financial condition, or
prospects of BCC and BCC Affiliates or otherwise would be material to making an
investment decision with respect to the publicly traded securities of BCC,
together with analyses, compilations, studies or other documents, whether
prepared by BCC or any other Entity, which contain or otherwise reflect such
information; provided, however, Confidential Information shall in no event
include information that has become public through no wrongful action of Lessee
or the Member or matters for which the Lessee or the Member are required to
disclose pursuant to 




                                       18
<PAGE>   19



Laws.

                  SECTION 7.03 CURE PERIOD FOR BCC. With respect to all
obligations of BCC or a BCC Affiliate under the Transaction Documents, in no
event shall be BCC or such BCC Affiliate be in default regarding any such
obligations unless and until Lessee and/or the Member provides notice to BCC of
such default and a period of no less than ten (10) days (or such longer period
as may be provided in the Transaction Documents) to cure such default.

                                  ARTICLE VIII
                                  MISCELLANEOUS

                  SECTION 8.01 DEFINITIONS; INTERPRETATION; MISCELLANEOUS.
Capitalized terms used but not otherwise defined in this Agreement have the
respective meanings specified in Appendix 1 hereto; the rules of interpretation
and other provisions set forth in Appendix 1 hereto shall apply to this
Agreement. All exhibits, schedules, appendixes and other attachments to this
Agreement are incorporated by reference herein

                  SECTION 8.02 NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered in person, Federal Express or other recognized overnight courier or
sent by registered or certified U.S. mail, return receipt requested or sent by
facsimile or telecopy transmission and addressed:

                           (i)     If to the Lessee or any Member, at:

                                   Sherry, Coleman & Holthouse LLP
                                   610 Newport Center Drive
                                   Suite 1200
                                   Newport Beach, CA 92660


                           (ii)    If to BCC, at

                                   c/o BCC Development and Management Co.
                                   5021 Louise Drive
                                   Suite 200
                                   Mechanicsburg, PA 17055

or to such other address or facsimile number as a party may designate by notice
to the other parties hereto.

                  SECTION 8.03 JURISDICTION. THE LESSEE AND THE MEMBER HEREBY
IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF ANY PENNSYLVANIA COURT OR
FEDERAL COURT SITTING IN PENNSYLVANIA IN ANY 




                                       19
<PAGE>   20



ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE
OTHER TRANSACTION DOCUMENTS TO WHICH THE LESSEE IS A PARTY, AND THE LESSEE AND
THE MEMBER HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING SHALL BE HEARD AND DETERMINED IN SUCH PENNSYLVANIA COURT OR IN SUCH
FEDERAL COURT. THE LESSEE AND THE MEMBER HEREBY IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO
THE MAINTENANCE OF SUCH ACTION OR PROCEEDING. THE LESSEE AND THE MEMBER
IRREVOCABLY CONSENT TO THE SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND
ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING BY THE
MAILING OF COPIES OF SUCH PROCESS TO THE LESSEE AT ITS ADDRESS SPECIFIED IN
SECTION 8.02. THE LESSEE AND THE MEMBER AGREE THAT A NONAPPEALABLE JUDGMENT IN
ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER
JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.
NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF BCC TO SERVE LEGAL PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF BCC TO BRING ANY ACTION
OR PROCEEDING AGAINST THE LESSEE OR ITS PROPERTY IN THE COURTS OF OTHER
JURISDICTIONS.

                  SECTION 8.04 PERFORMANCE OF LESSEE'S DUTIES. The Lessee's
obligations, and the obligation of the Member, under this Agreement and the
other Transaction Documents shall be performed by the Lessee and the Member at
their sole cost and expense. If the Lessee or the Member shall fail to do any
act or thing which it or they have covenanted to do under this Agreement or any
of the other Transaction Documents, BCC may, but shall not be obligated to, do
the same or cause it to be done either in the name of BCC or in the name and on
behalf of the Lessee or the Member, and the Lessee and the Member hereby
irrevocably authorizes BCC so to act.

                  SECTION 8.05 INDEMNIFICATION. (a) The Lessee agrees to
reimburse BCC for all costs and expenses, including reasonable counsel fees and
disbursements, incurred, and to indemnify and hold BCC harmless from and against
all losses suffered by BCC in connection with: (i) any breach by Lessee or any
Member of any covenant, agreement, representation or warranty under any
Transaction Document and (ii) any claim, debt, demand, loss, damage, action,
cause of action, liability, cost and expense or suit of any kind or nature
whatsoever, brought against or incurred by BCC, in any manner arising out of or,
directly or indirectly, related to or connected with the operation of the
Lessee's business, which claim, debt, demand, loss, damage, action , cause of
action, liability, cost or expense was not caused by the acts or omissions of
BCC or a BCC Affiliate. The Lessee shall indemnify BCC as provided herein upon
demand and in immediately available funds.

                  (b) BCC agrees to reimburse the Lessee for all costs and
expenses, including 




                                       20
<PAGE>   21



reasonable counsel fees and disbursements, incurred, and to indemnify and hold
Lessee harmless from and against all losses suffered by Lessee or the Member, as
the case may be, in connection with any breach by BCC or any BCC Affiliate of
any covenant, agreement, representation or warranty under any Transaction
Document and (b) any claim, debt, demand, loss, damage, action, cause of action,
liability, cost and expense or suit of any kind or nature whatsoever, brought
against or incurred by Lessee, in any manner arising out of or, directly or
indirectly, related to or connected with the operation of BCC's or a BCC
Affiliates' business, which claim, debt, demand, loss, damage, action , cause of
action, liability, cost or expense was not caused by the acts or omissions of
Lessee or the Member. BCC shall indemnify the Lessee and/or the Member (as the
case may be) as provided herein upon demand and in immediately available funds.


                  SECTION 8.06 INJUNCTIVE RELIEF. The Lessee and each Member
recognize that, in the event the Lessee or any Member fails to perform, observe
or discharge any of its or their obligations or liabilities under this Agreement
or any of the other Transaction Documents, any remedy of Law may prove to be
inadequate relief to BCC; therefore, the Lessee and each Member agrees that BCC
shall be entitled to temporary and permanent equitable relief in any such case
without the necessity of proving actual damages.

                  SECTION 8.07 BINDING EFFECT. This Agreement shall be binding
upon and inure to the benefit of the Lessee, the Member and BCC and their
respective personal representatives, heirs, successors and assigns, except that
Lessee shall have no right to assign its rights hereunder or any interest
herein. In the event of an assignment of BCC's obligations and rights hereunder,
BCC shall nonetheless remain primarily liable to Lessee and the Member for BCC's
obligations hereunder.

                  SECTION 8.08  WAIVERS.

                  (a) EACH PARTY HERETO ACKNOWLEDGES THAT ANY DISPUTE OR
CONTROVERSY BETWEEN THE LESSEE, THE MEMBER AND BCC WOULD BE BASED ON DIFFICULT
AND COMPLEX ISSUES OF LAW AND FACT. ACCORDINGLY THE LESSEE, EACH MEMBER AND BCC,
HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN
ANY COURT OR TRIBUNAL IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE
LESSEE AND/OR THE MEMBER ARISING OUT OF THIS AGREEMENT OR ANY OTHER TRANSACTION
DOCUMENT, AND WHETHER NOW EXISTING OR HEREAFTER ARISING, AND LESSEE AND THE
MEMBER HEREBY AGREE AND CONSENT THAT ANY SUCH ACTION OR PROCEEDING SHALL BE
DECIDED BY A COURT TRIAL, IF BCC SO CHOOSES, WITHOUT JURY AND BCC MAY FILE AN
ORIGINAL COUNTERPART OR COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE
OF THE CONSENT OF THE LESSEE AND THE MEMBERS TO THE WAIVER OF THE RIGHT TO TRIAL
BY JURY.



                                       21
<PAGE>   22



                  (b) FURTHER, THE LESSEE AND THE MEMBER WAIVE THE BENEFIT OF
ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS.

                  (c) THE FOREGOING WAIVERS HAVE BEEN MADE WITH THE ADVICE OF
COUNSEL AND WITH A FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF.

                  SECTION 8.09  CONFLICT WITH LEASE DOCUMENTS

                  This Agreement is subject to the covenants and agreements
contained in the Lease and other Lease Documents. In the event of any conflict
between the provisions of this Agreement and the Lease Documents, the provisions
of the Lease Documents shall control.

                  SECTION 8.10 THIRD PARTY BENEFICIARY

                  BCC, the Member and the Lessee each acknowledge and agree that
this Agreement and the rights hereunder are intend to benefit, in addition to
the parties hereto, the Lessor, who shall be deemed to be a third party
beneficiary hereof. Without limiting the generality of the foregoing, (i) the
representations, warranties, affirmative covenants and negative covenants of
Lessee and the Member contained herein shall inure to the benefit of Lessor
(together with BCC) and (ii) the Lessor may enforce any or all of the provisions
herein contained. BCC hereby acknowledges and agrees that any security interest
BCC acquires in personal, intangible and other property of the Lessee pursuant
to this Agreement shall be and is subordinate to the security interest of Lessor
created under the Lease and the Senior Lender under the Senior Credit Documents.

                  SECTION 8.11  NO AMENDMENT

                  BCC, Lessee and the Member hereby agree that no Transaction
Document shall be amended, modified or altered in any manner without the prior
written consent of the Lessor.






                                       22
<PAGE>   23

                  IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound, have caused this Shortfall Funding Agreement to be executed by
their respective officers or authorized agents as of the date first above
written.


                                         C&G HEALTHCARE OF __________, LLC



                                               By:
                                                  ---------------------------
                                                  Manager


                                               MEMBERS:



                                               ------------------------------




                                               ------------------------------


ATTEST:                                  BALANCED CARE CORPORATION



                                         By:
---------------------------                 ---------------------------------

                                         Title:
                                               ------------------------------



                                       S-2
                         [Shortfall Funding Agreement]
<PAGE>   24



                    OMITTED SCHEDULES/EXHIBITS

SCHEDULE 1          MEMBERS OF LESSEE

EXHIBIT A           FORM OF NOTE

EXHIBIT B           FORM OF LEASEHOLD MORTGAGE

EXHIBIT C           FORM OF OPTION AGREEMENT